Wall Street's Worst Reporting

I've had my share of hysterical headlines here at Fool.com. One even erroneously implied that reinvesting dividends was a secret to the success of master investor Warren Buffett. That was a shameful mistake -- Buffett doesn't reinvest dividends -- which I've tried to make up for by being more thorough in my analyses since.

Of course, that's as it should be; due diligence is simply part of the business of covering stocks. Yet exactly none of that was on display yesterday in the early reporting of Akamai Technologies' (Nasdaq: AKAM  ) third-quarter 2006 earnings.

Hooray for hysteria!
Here's a sampling of Akamai headlines from after the bell, done in the style of Keith Olbermann's nightly "Worst Person in the World" segment on the MSNBC show Countdown:

Worse: We begin with Reuters, which balanced the technically correct but realistically dubious claim that Akamai's net profit had dropped by pointing out that management upped guidance. 50% accurate is better than 0%, right?

Worser: Next, TheStreet.com, whose normally excellent Katie Dean wrote a fearmongering story that said Akamai's profit had "slumped." At least she mentioned that last year's Q3 included a tax benefit that artificially inflated results from that period.

Worst: But our winner is MarketWatch, which published a screaming headline that said Akamai's profit fell 95% (!) but which then offered little explanation as to why:

"The Cambridge, Mass.-based company, which provides Internet delivery services for Web sites and corporations, reported profit of $14 million, or $0.08 a share, compared to $272 million, boosted by a one-time tax gain, or $1.71 a share from a year ago." [Emphasis mine.]

Um, guys? How about mentioning that the tax gain was $1.59 a share? Or that Akamai's adjusted results improved and beat estimates on both the top and bottom lines? Oh, why bother. The ticker-chasers at MarketWatch ... authors of today's worst financial reporting in the world!

Back to reality ...
The truth, of course, is that Akamai's earnings report was outstanding. Sales increased 47% year over year and 11% sequentially to $111.5 million. Meanwhile, per-share normalized net income rose by 71% year over year to $0.24. (Get all the numbers here.)

Owner earnings also improved, to $63.6 million through the first nine months of the year. That's up 64% from $38.7 million over the same period during 2005, and it puts Akamai firmly on pace to book $90 million in cash earnings this year.

No, really. Let's do the math. Roughly 21% of Akamai's $302.9 million in year-to-date revenue has flowed into its cash coffers as owner earnings. Assuming that ratio remains steady -- it has for some time now -- and that management's revised guidance of $421 million to $426 million in full-year revenue is on target, then $88 million to $89 million in 2006 cash earnings is achievable. Any significant upside would push the total to more than $90 million.

If that sounds like small potatoes for a $7 billion-market-cap firm, remember that Akamai booked just $69 million in OE last year and $42 million in 2004. At $90 million, Akamai will have grown cash earnings by roughly 46% annually over two years.

And that one-time tax benefit? It gives Akamai the right to use roughly $300 million of the billions in losses it incurred from 1999 to 2003 to offset current taxes owed. It's a little like how you or I can use stocks sold at a loss during the tax year to offset capital gains we've realized. Management says it won't use up the credits till after 2010, which, in turn, should protect the firm's ample cash earnings.

... Oh! There goes gravity!
But don't expect any of that to satisfy the traders. Akamai's shares had fallen by 3% as of this morning.

How silly. If this business really interests you, as it does many of our Motley Fool Rule Breakers subscribers -- not a few of whom have likely more than tripled their money since we first recommended the stock last year -- use today's selling as an opportunity to profit from hysterical headlines. At least one good thing can come from this otherwise farcical display.

A web of related Foolishness awaits:

Akamai is one of three Rule Breakers selections to have tripled. Care to find out the names of the other two? Click here to get 30 days of free access to the service.

Fool contributor Tim Beyers, ranked 1,376 out of 11,558 inMotley Fool CAPS, offers his apologies to Keith Olbermann for the poor imitation of his "Worst Person" segment. He'll understand if he makes the list in an upcoming show. Tim owns shares of Akamai. Get the skinny on all of the stocks in Tim's portfolio by checking his Foolprofile. The Motley Fool has a disclosure policy.


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